Obtaining Health Insurance: Individual vs. Group Plans

There are several ways in which an individual may obtain health insurance. And in the comment thread following my post - “Health Insurance Coverage Protects from Catastrophic Health Costs (!?!) - I promised to discuss various aspects of health insurance. Today we will discuss some fundamental differences between obtaining individual or group health insurance plans.

The idea behind a group plan is to spread the risk of claims over a wider selection of people, which would theoretically have a mix of healthy people who don’t file claims and people with serious illness or childbirth. The insurance company sets the premium rates for the group to cover the average amount of claims, plus profit. It is important to note that each state regulates health insurance plans, except....

Some corporations and businesses may choose to have a health insurance company administrate a self-funded group plan in which the employer creates a fund to pay health claims and purchases stop-loss insurance to cover claims exceeding the resources in the fund. Self-funded group plans were made available under Employee Retirement Income Security Act (ERISA) and are not subject to state regulations. If one insured person in the group suddenly experiences expensive health claims (such as is associated with MS), premiums for all group members would be adjusted (raised) the following year to cover the increased expense. At times, employees might not even know that their company’s health benefits are self-funded.

Another option is to purchase a policy on the individual health insurance market whose plans were originally designed to provide insurance to unemployed or self-employed persons not covered under an employer’s plan. Individual health policies are often more expensive and offer fewer benefits, but are portable and guaranteed renewable in most circumstances. Each state has rules governing individual policies. It’s important to note that persons applying for individual policies will need to go through the underwriting process which determines the risk to the insurance company and makes the applicant subject to adverse selection.

For individuals deemed uninsurable by traditional underwriters, thirty-three states have High-Risk Pool guaranteed-issue plans. Virginia is not one of those states. In other states, such as Ohio and Idaho, premiums for high-risk plans are limited to 2.5 of regular underwritten policy rates. If that were the case in Virginia, my underwritten policy (which was obtained when I was considered healthy and insurable) would cost $9450 annually instead of $3780 as it does now. That’s a big jump in premium costs.

There are important differences between group and individual plans when it comes to applying for coverage, the most significant difference being exclusions on pre-existing conditions found in a person’s medical history, which for MS automatically categorizes us as high-risk individuals and uninsurable. People with pre-existing conditions may be unable to find affordable health insurance or any health insurance at all if they are unable to pass the underwriting process.

One the other hand, group plans cannot single out high-risk individuals; nor can they deny them health coverage. All individuals are covered regardless of existing health problems, and the costs of high-risk individuals become spread over the total cost of the group.

A third way, which I will not go into just now, is through government programs, such as Medicare, Medicaid, the Veterans Administration, and the Federal Employees Health Benefit Plan (FEHBP).

In a future post, I will discuss the differences between benefits found in group vs. individual health insurance policies. This is where it gets really interesting.